Does operational sloppiness lie at heart of suitability review?

The FSA’s suitability review has exposed weaknesses in the systems and procedures of several wealth management firms, causing some to question whether this in fact lies at the heart of the issue.

Following a review of 16 wealth management firms, the FSA found that 14 were judged to pose a high or medium risk of detriment to clients, causing the regulator to publish a ‘Dear CEO’ letter.

‘The word on the street is it doesn’t matter what response you gave [to the Dear CEO letter], you will have a follow-up visit,’ said one senior executive at a large wealth management firm.

‘The FSA is having a look at all firms on an impact basis and are looking for consistent client risk assessment, repeatability of process and an audit trail of how decisions are made and how the alignment to the client’s risk appetite is achieved and maintained over time.’

Richard Scrivener, a regulatory consultant at Bovill and co-author of the ‘Dear CEO’ letter during his time at the FSA, believes integration challenges following acquisitions have played a key role alongside a historical lack of regulatory oversight.

‘Quite a lot stems from a lack of regulatory oversight in this area, which has bred complacency at firms. This is something that has struck us over the last few months,’ he said.

‘Although firms have been quick to bring on new clients through acquisitions or hires, systems are often the last thing to be integrated, he explains, presenting challenges later down the line.

‘There is still a feeling that the fund manager owns the client rather than the firm, and the fund manager retains the information because knowledge is power,’ Scrivener said.

He added unsuitable portfolios tend to be more of an issue at an individual level, rather than a company-wide problem.

‘There are sporadic patches of potentially unsuitable portfolios and sometimes they come as a surprise to the firm that they have got these portfolios because they thought things were tightly managed, so this is possibly more on an individual basis than a systemic company-wide unsuitability,’ he said.

Yet although the findings of the FSA’s review will force firms to evaluate how robust their internal systems and processes are, a number of wealth managers maintain they understand their clients’ financial situation, risk profiles and have constructed suitable portfolios. Yet they question whether they should be penalised for having client information which is not necessarily easily accessible or in one place.

One wealth manager, who preferred to remain anonymous, explained: ‘We run portfolios in a suitable way, but we are just making sure that we have got all the evidence immediately to hand.’

Another investment manager from a national firm also highlighted pressure for new hires to bring over clients from their previous firms as a key contributor to the suitability question.

‘When these guys go to the firms they just sign clients up. There is no real fact finding. Life continues but the over-hang is they have not done a lot of the crucial stuff and now they are doing a lot of remedial work to get up to speed, which is bogging down a number of businesses,’ he said. ‘I don’t think this is a back office issue at all.

‘It would not surprise me if some clients within the whole business have not been risk profiled. These firms have never had to establish what the underlying risk profile is.’

Scrivener added: ‘A number of firms are going through massive repapering and are gathering new information about their client base. They are taking their guys off the road and stopping them from getting new clients through the door, which could have an effect on bonuses. It is a harsh lesson to get everything up to date.’

Robert Hupe, a management consultant at Knadel, argues a robust operational model is ‘an absolute prerequisite for giving regulated advice’.

‘You can give fantastic advice, but the FSA will still have issues with you if you don’t have a process and can’t evidence it,’ he said.

Dart Capital’s Richard Whitehead echoed these sentiments: ‘It surprises me in this day and age that you can defend yourself by saying that you are not documenting things. Nowadays everything has to be documented. It is good business practice.’

Both Hupe and Scrivener believe the key to achieving a robust operational model is not necessarily having a new customer relationship management system but simply good quality information.

In fact, Hupe suggests that issues often arise after new systems are introduced and are not properly integrated.

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